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administration violated the exclusive benefit rule of section
401(a)(2). Specifically, respondent contends that the plan
failed to satisfy the exclusive benefit rule when it lent 90
percent of its assets on an unsecured basis to Estes Co., with
whom both Mr. Shedd and petitioner had significant and longtime
financial relationships.5 When the loan was made, Mr. Shedd had
retired from both petitioner and Estes Co., he was receiving
benefits from the plan, and petitioner's equity interest in Estes
Co. was being liquidated over a 10-year period which had begun in
1981.
Section 404(a)(1)(A) provides that contributions to a
pension trust are deductible by the employer if the trust is
exempt from tax under section 501(a). In order for the trust to
be entitled to tax-exempt status under section 501(a), a
retirement plan must be established by an employer and meet all
the requirements of section 401(a). Professional & Executive
Leasing, Inc. v. Commissioner, 89 T.C. 225, 230 (1987), affd. 862
F.2d 751 (9th Cir. 1988). If a trust qualifies under section
401(a), contributions to the trust on behalf of employees are not
includable in the employees' income until the year money is
actually distributed to the employees. Sec. 402(a)(1); Ludden v.
Commissioner, 68 T.C. 826, 829-830 (1977), affd. 620 F.2d 700
(9th Cir. 1980). However, if the trust fails to qualify under
5 At time of default in February 1989 the loan represented
58 percent of the plan's assets.
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